Trade Secret Laws Help Energy Companies Protect Assets

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By Nushin Huq

July 28—In the tumultuous oil and gas business with companies slipping into bankruptcy, employees getting laid off or starting new ventures, attorneys are seeing more trade secret cases amid the continued slump in energy prices.

“Desperate times call for desperate measures,” said Brendan Cook, a partner at Baker & McKenzie LLP, Houston, who said he has worked on three or four cases over the past year involving partnership disputes, temporary restraining orders and injunctions. “A lot stem from people who left their company for another company or started their own company.”

As oil and gas prices remain low, companies are working harder to protect their intellectual property. A private trade secret theft claim—which can be brought in state court as well as federal court after this year's passage of the Defend Trade Secrets Act—tends to be easier to prove than a patent infringement claim, attorneys said.

Texas, the nation's leading oil and gas producing state, has its own trade secrets law. The many energy companies headquartered there have multiple options when strategizing how to protect their assets. Although, in any given case, the facts may ultimately dictate the best path to take.

“I’m actually seeing a bit of a decrease in the number of patent infringement lawsuits, and a definite increase in the number of trade secret cases,” Lisa Meyerhoff, a Baker & McKenzie partner, told Bloomberg BNA.

Trade secret litigation may involve a company suing a former employee, or companies involved in joint ventures, joint development agreements or joint alliances in an oil patch suing one another, Cook said.

A refinery stands in the background as a pump jack operates in an oil field near Corpus Christi, Texas. In January crude oil prices fell to the lowest in 13 years.

Recent cases involving well-known energy companies highlight the trend. In May, Apache Corp. filed a suit in a state district court against a former executive, alleging he set up a company to directly compete with Apache in Egypt. Apache Corp v. Maher, No. 201634027-7 (Tex. Dist. Ct., complaint, May 24, 2016 ).

Another case in state court involved two companies, Schlumberger subsidiary M-I SWACO and National Oilwell Varco. The state Supreme Court weighed in when plaintiff M-I SWACO asked the trial court—which refused to consider the request on due process grounds—if National’s representative could leave the room when the allegedly stolen trade secrets were discussed. The high court sent the case back after ruling that due process doesn't require a company to automatically get access to trade secret evidence, and district courts must decide how much competitive harm would result from revealing secrets in open court. In re M-I LLC, No. 14-1045 (Tex. Sup. Ct., order, May 20, 2016 ).

Technology protected by patents or trade secrets can provide a competitive advantage for energy companies—especially so-called upstream companies involved in oil and gas exploration and production. During the current slump in the energy sector, with fewer jobs and clients, companies that can tout technology for getting a job done may be able to distinguish themselves when it comes to seeking business.

In terms of protecting their technology, energy companies may have little choice. If they own patented technology, they must sue for infringement if they need to take legal action to protect an invention. A patented invention is, by necessity, disclosed—so it can't be protected as a trade secret. But in cases where technology isn't patented—or is part of additional “know-how” that's not disclosed in a patent's specification—companies have the option of suing for trade secret theft.

Why Trade Secrets

“Personally, I think if you have a good faith basis for a trade secret claim, you ought to bring it,” Paul Morico, a partner at Baker Botts LLP, told Bloomberg BNA.

“You've got a better chance of prevailing on that these days than you do on a patent claim,” said Morico, adding that he advised one client who approached him with a patent infringement case to go with a trade secret lawsuit instead. The case settled the day before it was scheduled for trial.

“I’m not sure if that would have had happened in a patent infringement case,” said Morico, noting that it's easier to prove the elements in a trade secret case than in a patent infringement case.

Also, laws and case law have developed so that it's become easier to invalidate patents, Morico said. But companies don’t have to worry about invalidating trade secrets, only that they take reasonable measures to keep them confidential—the equivalent of ensuring that they keep their value.

“If you’re going to be a patent plaintiff and try and prevail in a case, you have a lot more hoops to jump through,” Morico said.

Filing a theft of trade secret claims also means avoiding a Markman hearing, in which a federal court interprets a patent's claims. To prove infringement, a plaintiff must show that each element of a claim is practiced or infringed by another party. To prove theft of a trade secret, a plaintiff just has to show that someone had access to the trade secret and either took it or most likely is using it.

“Those type of cases are actually easier to prove,” Morico said. And even if a jury awards a patent infringement claim, “It's a minefield when it comes time for an appeal, given that there are so many areas one can press on to get a reversal.”

The U.S. Court of Appeals for Federal Circuit, where patent appeals are brought, has a 50-percent reversal rate, Meyerhoff said. “You could have a big win [for a patent infringement case], have it go up to the Federal Circuit, have it come back two years later and say no you didn’t win,” she said.

On the other hand, appeals of trade secret theft cases filed in Texas go to the U.S. Court of Appeals for the Fifth Circuit in New Orleans, where the affirmation rate is 90 percent. It’s easier to get an injunctive order with trade secrets, Cook said. The cases are also quicker and cheaper than traditional patent litigation.

Current advancements in computer forensics have also made the theft of trade secrets easier to prove than in the past, Morico said.

“Years ago, you had to catch the person running out with the file,” said Morico, who's had a few trade secret cases that used computer forensics that were settled relatively quickly. By contrast, it might take up to six months to get a preliminary hearing on a patent infringement case.

There is also a long-term benefit with a trade secret lawsuit, Meyerhoff said. Patent protection lasts only 20 years but protection on a trade secret can last forever, as long as it is kept confidential. That could be particularly useful when riding out the energy industry's ups and downs, Meyerhoff said.

“Maybe in the downturn you’re not using the technology, but the company will start using it again in the upturn,” she said.

Federal Versus State

Unlike patent infringement cases, which are filed in federal court, theft of trade secret cases can be filed in state, federal or both courts. In the energy industry, because so many energy companies are based in Houston, many state-level cases are filed in the Harris County District Courts, while federal cases are filed in the U.S. District Court for the Southern District of Texas.

The passage of a new federal and state laws has also made it easier to bring trade secret theft claims.

The adoption of the Uniform Trade Secrets Act in Texas, in September 2013, meant that attorneys had a far greater cache of case law relating to theft of trade secrets they could rely on, Michael Barbee, an attorney with Griffith, Bates, Champion and Harper LLP, Dallas, told Bloomberg BNA. Prior to that law’s adoption, suits would be filed under Texas common law, a combination of torts and unfair competition, Morico said.

After that law was adopted, trade secret claims in Texas increased. In 2014, energy companies filed over 40 cases in which there was a trade secret claim in Harris County, compared with nine in 2013.

In May 2016, President Barack Obama signed the federal DTSA into law, which further eased the process of pursuing trade secret claims. Prior to that law's passage, a trade secret claim could only be filed in federal court if a plaintiff had diversity jurisdiction, meaning the parties are from different states and the amount in controversy exceeds $75,000, Eric Wood, a Dallas-based intellectual property attorney with Scheef & Stone LLP, told Bloomberg BNA.

“Now it doesn’t matter where the companies are incorporated because you have the federal statute,” Wood said. “If you have two Texas companies, they can make a determination if they want to file in federal court or state court.”

While the new federal law is based on the UTSA, there are some significant differences that can affect whether a company sues in state or federal court.

Federal law, for one, prohibits injunctions that would stop former employees from getting jobs simply because they have trade secret knowledge, but Texas law doesn’t address the issue. The federal law also allows ex parte seizure, allowing property to be seized to prevent defendants from using or disseminating the trade secret further, Wood said.

“It’s a pretty big deal,” he said. “But there are procedural protections to make sure people don’t misuse it.”

Parties can countersue for wrongful seizure, Barbee said. But the new law doesn’t define wrongful or excessive seizure, and that will remain unclear until case law on ex parte seizures and countersuits develops, he said.

To contact the reporter on this story: Nushin Huq in Houston at nhuq@bna.com.

To contact the editor responsible for this story: Mike Wilczek at mwilczek@bna.com

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